Proponents of real business cycle models argue that the correlation between changes in the money supply and changes in real GDP may reflect the fact that
A) the velocity of money is unpredictable.
B) the quantity of money demanded is relatively insensitive to changes in the interest rate.
C) as real output increases, the demand for money increases, leading to an increase in the money supply.
D) the free enterprise economy has strong self-regulating mechanisms promoting full employment.
E) the equation of exchange varies considerably over the course of the business cycle.

Question

Quizplus · Accepted Answer

Real business cycle models often suggest that changes in real GDP can lead to changes in the demand for money, which in turn can lead to changes in the money supply. This perspective views the money supply as responding to economic activity rather than primarily driving it.

Proponents of Real Business Cycle Models Argue That the Correlation